What happened
Shares of some major REIT stocks took a beating Monday as investors began to realize that the COVID-19 epidemic is going to be long-lasting and more detrimental to businesses than they anticipated. Park Hotels & Resorts (PK 1.24%), Host Hotels and Resorts (HST 1.55%), Gaming and Leisure Properties (GLPI 0.42%), and VICI Properties (VICI 0.54%) all plunged double digits and showed no signs of recovery.
| Stock | Max Daily Change | Change at Close |
|---|---|---|
| Park Hotels & Resorts | (26.2%) | (25.9%) |
| Host Hotels and Resorts | (21.3%) | (15.7%) |
| Gaming and Leisure Properties | (42.7%) | (41.1%) |
| VICI Properties | (34%) | (28.6%) |
Source: Google Finance.
Not only is travel reduced around the U.S. and the world, but hotels and casino companies are also starting to close down to keep employees and consumers safe.
Image source: Getty Images.
So what
REITs are often touted as a safe play in the market and consistent dividend payers, but there's more operational risk than you might think. Hotel REITs often generate cash flow directly from room rates, so if occupancy drops, so can cash flow. Casino REITs usually have a fixed component of rent and then can be tied directly to the hotel and casino revenue generated.
What changed Monday is the announcement that most major casinos are shutting down across the country, with no definitive plans to reopen. And hotel operators are closing in some locations as well. Gaming and Leisure Properties and VICI Properties own casino real estate, and with news that properties are shutting down, it's no surprise that they're being hit hardest.
This will ultimately flow down to the cash flow that REITs are allowed to pay out to investors as dividends. Don't be surprised if seemingly high dividends are cut in the next few months as cash flows don't live up to previous expectations.
Now what
More than most industries, I think investors really need to take a long view here. REITs own the underlying real estate of hotels and casinos, and that's a valuable asset long-term. Yes, there will be short-term impacts to operations and cash flows, but the business will return eventually.
This is actually an industry that can benefit from the liquidity and low interest rates being pushed by the Federal Reserve right now. That can help lower interest expenses and provide a cushion if cash flow is impacted for a few months. But long-term I think these stocks will be a great buy for investors willing to buy and hold.
